22 thoughts on “IHB News 5-1-2010”

1. ElvisInMiami May 1, 2010 at 2:21 pm

   If the hedge fund is a good idea why not let the government run it? Sort of a way for them to dig out of debt while saving the housing situation. IHB for prez:)

   Seriously, a couple of years ago (mid2007) when the first round of help for foreclosures were being discussed, my first thought was:
   “why not just let the homeowners rent their house and that keeps it out of foreclosure”

   I never put the sell it back to them later idea there, but most people argued that homeowners turned renters would feel that they are not making the money they thought so would either trash the place or be poor renters.

   Seriously how can you trust somebody to rent (when it takes 6+ months to kick them out) if they have a history of stopping payment?

   In addition, the change to renter (which I personally have done after selling my house a couple years ago due to relocation) could allow for greater location flexibility (I want to live closer to the city or my job) and finding a better deal for their money.

   If you had a deal to pay $3K/month for you $1.5M (purchase price, now work ~$1M) it is too good to be true. Problem is you could find similar houses for the same price and wouldn’t be as tied to your current home.
   1. Anonymous May 3, 2010 at 1:51 am

      Uh, doesn’t the govt already do that?

      http://www.washingtonpost.com/wp-dyn/content/article/2010/01/11/AR2010011103892.html

      “The Fed will return about $45 billion to the U.S. Treasury for 2009, according to calculations by The Washington Post based on public documents. That reflects the highest earnings in the 96-year history of the central bank.”
2. Alan May 1, 2010 at 2:39 pm

   There are plenty of examples to choose from, where a company/industry has the fiduciary duty to make profits, not worry about who is getting burned by it:

   It is the fiduciary duty of the health insurance companies to make the most money that they can – deny coverage to unhealthy people or those with the greatest risk of problems, dispute claims as long as possible, etc. are tools to get there.

   The banks are out there to make money for themselves, not to get 15% returns for pension funds.

   If your hedge fund idea works by chewing up the bad decisions of the banks, let them enjoy the feeling.
   1. Contango May 1, 2010 at 7:26 pm

      The other thing to consider is the total amount of capital required to obtain a significant percentage of foreclosures. If there are 100 million US households, 10% are distressed and the average value is $270,000, there is a total of $4 trillion of hedge fund capital required to buy out the defaulting housing debt. These numbers might be conservative as strategic defaults may increase like IR said.

      The total net worth of US households in 2009 is $55 trillion. So this means, almost 10% of all US wealth would have to go to Crusher LLC to completely buy out the housing market. As IR pointed out only a limited few actually invest in hedge funds which makes 4 trillion in capital even harder to come by. I know these numbers are rough, but the idea is to show the shear volume of capital required to completely buy out the housing market.

      IR I’m sure your idea will work to some extent, but I don’t think it will have the capital required to demolish the banks. However I hope it hurts them and as they still need to learn a painful lesson.

      I trust Wall Street like I trust the government; I have inherent trust the banking system will act in their own best interest. Your writing is extremely valuable and it’s thinkers like you who aren’t motivated by Wall Street bonuses and political forces that our society was once founded upon. I don’t think you need to need to be concerned about your “weapon of mass destruction” as the banks lost their moral obligation to society.
      1. IrvineRenter May 1, 2010 at 8:08 pm

         I shared a number of emails with Mish, and he made the same observation,

         “I agree with you that it is a good thing.
         Never said otherwise.

         It’s like a 1% solution with limited impact.”

         He is right, of course.

         I had lunch with a transaction attorney on Thursday who was intrigued by the idea. As we discussed the matter, we both noted that the market is so large that keeping this idea to myself isn’t necessary to have a successful fund. I could deploy a hundred million dollars and it wouldn’t make a dent in the problem. Maybe the coordinated efforts of funds with a hundred billion might have some impact, but Cartel Crusher LLC couldn’t do it alone. An entire cottage industry would need to spring up to tackle this problem.
         1. Alan May 2, 2010 at 12:08 am

            I wonder what percentage of the properties in distress are 2nd, 3rd, etc. investment properties of speculators and flippers? They never have and never intend to live there, in spite of what the loan papers may say. Of course there may already be a renter, but who would not care to pay above market rates to stay on.

            I do think as well that some number of people stuck in underwater mortgages would move for various reasons, if given the chance to get out.

            So Cartel Crusher would not actually be going after the entire underwater market, though that might not be any comfort to the banks.
3. theyenguy May 1, 2010 at 9:02 pm

   Joy Shenn reports in an April 29 Bloomberg article, that decisions by homeowners to walk away from mortgages they can afford, are accounting for more defaults, according to Morgan Stanley. About 12% of all mortgage defaults in February were strategic, up from about 4% in the middle of 2007, analysts led by Vishwanath Tirupattur wrote.

   I enjoyed the Couple With Photo captioned: We bought so much stuff had great vacations, cosmetic surgery, and the house paid for it all … I would have added in there … boob job … but that may be too-much, like in bad taste, but it would be the truth.

   You relate: When the purchase option came to me, I saw the short trade and the huge incentive to walk away it creates. It frightened me. What concerns me the most is the pressure this will put on banks for principal reductions. Principal reduction without foreclosure is the worst of both worlds — it rewards HELOC abusing squatters without doing much to lower prices. It would be less expensive for the banks than having the Cartel Crusher convince everyone to default because they can control the damage and prices will remain higher with fewer sales, the current status quo.

   My response is that the current status quo will not be maintained. Solyent Green Is People is coming very soon, most likely October, November or December of this year, due to liquidity evaporation, when equity and bond values collapse and interest rates literally skyrocket, just like they did in Greece. People will not be able to obtain access either money market accounts or brokerge acounts, because of liquidity issues, real estate values will plummet, and a hyper-inflation rush will come to currencies and consumer goods.

   Doug Noland in Safehaven.com article relates the landmark date of Tuesday April 27, 2010, that being the day the dislocation unfolded in the European Credit default swap market, which portends serious issues for sovereign debt markets globally. Mr Noland relates: There’s hope that European policymakers and the IMF can come up this weekend with a credible plan for Greek aid. I would tend to believe that the “genie is out the bottle” and that global markets are in the early stage of adjusting to new uncertainties and risk realities. Many that have planned on using derivatives markets to hedge future market risks may begin to reevaluate their approach to risk taking and management.
   http://www.safehaven.com/article/16619/tuesday-april-27-2010

   I believe even if the asset bust and hyperinflaiton rage were not to occur, the economy will tank from here on out, as stocks and bonds, fueled by yen carry trade investing, investment bank purchases, and the Federal Reserve TARP facility have ended, now that Goldman Sachs is being investigated for criminal wrong doing. We are going into a double dip recession, as the homeowners tax credit has expired, and higher consumer spending in Q1 still lacks vigor, the consumers will not bounce back with sustained strength; there is not enough underlying economic strength to catapult economic growth beyond 3.2 percent.

   For individuals, wealth and liquidity, can only come by physical ownership of gold coins, and gold at BullionVault.com, and by renting a residence rather than buying one; strategic default is the way of the future.
   1. Inflation is on the way May 2, 2010 at 2:59 am

      I think inflation is on the way but things won’t get as bad you relate. How much inflation and for how long is the question. We may have a 10% annual inflation (arbitrary estimate) for 2 or 3 years which will shrink the real value of the U.S. sovereign (government) debt and also get banks’ debts and assets into balance, and then try to have soft landing back to normal inflationary environment of 3% or so per annum, thereafter. I think the Federal Reserve Bank will need to keep rates low to achieve that, and low rates will also serve the purpose of keeping home prices flat or high. It’s a win-win situation as far as the Federal Reserve Bank is concerned.

      Needless to say, the above scenario will shrink the wealth of cash savers as well.

      IMHO.
4. tonyE May 1, 2010 at 9:29 pm

   (1) Goldman Sachs Krusher LLC.

   I figure that Goldman Sachs is already on the ball on this. Not only are they likely shorting their own stock but they likely also have access to a billion bucks with which to start GS Krusher Inc… in this case, I hope they do sell a mutual fund on it because I want in.

   (2) A mortgage over a MIL.

   Not so long ago (couple of years) the LA Times had an RE article where smug real estate agents were proclaiming that “10 MIL” were the new “1 MIL” because 1 MIL was sooo commonplace.

   Now, I just can’t wrap my head around that. Never had. What would the payment be on a 2MIL mortgage. Even on a teaser rate that would have to be 10K a month? That’s insane. I mean, even if I made 500K a year I would not want to pay so much in mortgage payments. Given our tax laws it’s a counterproductive way of using your money.

   OTOH… maybe these fools were really gaming the market… drive up the prices, stop paying, save money and then invest in GS Krusher LLC…

   (3) TRidge BBQ anyone?

   Since these morons are squatting and we’re gonna pay for it, I figure us peons own the place.

   That’s a nice BBQ out by the “casita”. So I say we load up on fine prime steaks and wine from Costco and we march on up to this fine chateau and help ourselves to OUR fine BBQ facilities.

   I mean, if they call the cops, we’ll tell the cops about the stunt these people are pulling and we invite them to some filet topped with stilton cheese and brown sauce. Offer them sparkling water with a twist of lime.. since they can’t drink while in duty.

   Bring some cake so the squatters can eat their own cake, not our steaks.
   1. matt138 May 4, 2010 at 9:08 am

      I’m in. They can’t drink while on duty doesn’t mean they won’t.
5. newbie2008 May 1, 2010 at 10:22 pm

   IrvineRenter,
   The “banks” are officially owned by the shareholders, but the banksters run the banks and get first feeding at the trough. If the banks win, the shareholders are rewarded but not before the banksters get their majority cut. If the bank loses, the shareholders are left holding the bag, but the banksters are rewarded with retention bonus and resetting of options for another near guarnteed win for the banksters.

   The hedge funds you describled will be owned by the banksters of GS and other banks, the majority ownership will not be the shareholders of GS. It will only become shareholders of the banks when the profits have been squeezed out and the properties are a liablity instead of an asset. At that time the properites and/or hedge funds will allow investment by pension funds. Just another round with a different name or business model. You can’t pay people 10 million and expect real profits for the shareholders and healthy economy. There’s just too much incentive for manipulating the books and making bubbles in the stock market.
   1. GS Stock May 2, 2010 at 3:07 am

      I would not buy GS stock regarless of their legal issues. If I’m not mistaken, when they had windfall profits a few months ago, they made sure much of it went to GS employees, management…etc. If one was a shareholder, he/she did not participate in sharing the windfall. I guess this is similar to “privatize profit and publicise losses”.
      1. Alan May 3, 2010 at 12:25 am

         Bankster bonuses come out of revenues. They tap into the money stream before such trivial details as profit or loss get worried about. Since there are always revenues, there are always bonuses. Shareholders of course are kind of stuck at the far end. Warren Buffett knew better than to buy common stock in GS.
         1. newbie2008 May 3, 2010 at 12:37 am

            You’re right, the banksters take the money off the top. Their brand of socialism (government ran industries), but technically it is fascism (corporate ran government). Either term, excessive welfare for the banksters.
            1. Anonymous May 3, 2010 at 1:59 am

               Especially outrageous that Hank Paulson got to cash his Goldman Sachs stock, tax free, when he became Secretary of the Treasury

               A Loophole For Poor Mr. Paulson
               http://www.forbes.com/2006/06/01/paulson-tax-loophole-cx_jh_0602paultax.html
6. E May 2, 2010 at 5:06 am

   I’m absolutely flabbergasted at the number of $3,000,000+ mortgages.

   How easy was it to get these mortgages?

   I’m reminded of the Hollywood HELOC abuse post where the long term owner (probably without sufficient income) was able to refinance to over 3 million.

   I guess if a strawberry picker could get a $700,000 loan, then someone making 100k could easily get a $3MM loan?

   WTF is right!
7. Walter May 2, 2010 at 8:44 am

   “Did you know that almost 80% of the BMWs and Mercedes on the road are leased?”

   I own my BMW outright. It has 97,000 miles, but I figure it has another 100,000 miles in it. Then I can buy another cash with what I have saved driving this one into the ground.
   1. E320 May 2, 2010 at 9:22 am

      Mine is a Mercedes E320 with 100,000 miles on it. It’s paid for as well. I figure I will drive it another 2 or 3 years more.
      1. newbie2008 May 3, 2010 at 12:32 am

         I sold my diesel MB with 150,000 miles (third care with only 2 drivers). The buyer expected at least 200,000 more miles for the little tank.
         I expect to run the other 2 into the ground. If you can pay cash for the cars, you likely can afford them.
8. Freetrader May 3, 2010 at 8:55 am

   You are become Death, the Destroyer of Worlds!

   (Oppenheimer’s A Bomb Bhagavad Gita reference)
9. Chris May 3, 2010 at 1:07 pm

   “Did you know that almost 80% of the BMWs and Mercedes on the road are leased?”

   Where did you get this information IR?
10. BigD May 3, 2010 at 7:23 pm

    “Did you know that almost 80% of the BMWs and Mercedes on the road are leased? That is pretending.”

    I laughed so hard at that, I farted…

    So TRUE, in SoCal.
    The best PLACE to be a PHONEY. 😉

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